The effect of diversification on firm returns in chemical and oil industries

Purpose – The purpose of this paper is to investigate the effect of diversification on returns of firms in chemical and oil industries. Design/methodology/approach – In order to control for market effect, industry effect, and effects of endogenous variables of a sample firm that lead the firm to decide to diversify or refocus on stock returns, three-factor asset-pricing models introduced by Fama and French are used in each industry. Findings – It is found that diversified firms have significantly higher returns than focused firms in both chemical and oil industries. It is also found that the three-factor model explains much of the variation in the average stock returns for both focused firms and diversified firms, which is consistent with Fama and French. Originality/value – Provides new evidence for the effect of diversification on firm returns in oil and chemical industries.